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CostHelper > Personal Finance  > Taxes & Financial Planning > 401(k)

401(k) Cost


How Much Does a 401(k) Cost?

 
low costAverage Contribution: 5.5%-7% of Pre-Tax Salaryaverage costInvestment Fees: $5-$13.50 per $10,000 Investmenthigh costPlan Administration Fees: $20-$50 Per $10,000 in Plan Assets
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A 401(k) is a retirement plan established by employers that allows employees to make pre-tax contributions. The plan, named for the section of the federal tax code that governs it, consists of a number of employees who pay into it. The money is used to invest in many financial instruments, including mutual funds.

Typical costs:

  • Plan administration fees, also called the fund expense ratio, can range from 0.2%-5%, depending on the plan's size and activity. Annually, that's about $20-$50 per $10,000 in plan assets. This may or may not include all fees associated with the account. Most fund expense ratios are less than 1.72%, and average less than 1%, according to the Investment Company Institute[1] .
  • Investment fees cover the costs of managing the plan's investments. These miscellaneous fees are not apparent in statements typically sent to plan holders, and are sometimes included in plan administration fees. Investment fees range from 0.05%to 1.35%, or $5-$13.50 for every $10,000 invested.
  • There is no initial, upfront cost for joining a 401(k) plan[2] . The start-up costs associated with the designing of a new 401(k) plan are negligible because they are spread out among the plan's many participants over decades.
  • Those with 401(k) plans don't pay taxes on their contributions up front. Plan participants contribute an average of 5.5%- 7% of their salary pre-tax into their 401(k) plan. Participants pay taxes on their savings as income when they begin withdrawing from the plan after retirement.
Related articles: Mutual Fund, Annuity, Reverse Mortgage, IRA, Financial Planner

What should be included:
  • Plan administration fees cover the cost of maintaining and administering the 401(k) plan itself, and sometimes include investment fees as well. Plan administration fees cover recordkeeping, printing and mailing plan documents, maintaining the website and customer-service personnel.
  • Investment fees pay for all the activity involved in making the plan's investments. These can include brokerage fees, advisors' fees, and CPA audit fees. If a plan's administration fee is on the high side - 1.5% or more -- it may be because the fee includes these pass-through investment fees. Plans that are actively managed (stocks and bonds are traded relatively frequently within the account) will have higher investment fees compared with those that are passively managed.
  • Most 401(k) plans are made up of mutual funds, which may carry various fees and operating expenses.
Additional costs:
  • As many as 14 different people or institutions might collect money for services rendered on a plan, depending on the size of the plan and the amount of investment activity. The below charges are sometimes included in the plan administration fees or investment fees; check with the plan administrator to find out which fees apply to the account.
  • A custodial fee, charged by a broker or financial institution for physically holding the money invested, costs about 0.05%, or about $5 for every $10,000 invested. Investment advisors and education fees cost about 0.50%per year, or $50 for every $10,000 invested.
  • Administrative fees, which may cover recordkeeping, accounting, legal and trustee services -- cost about 0.15%, or about $15 for every $10,000 invested.CPA audit and legal fees cost about 0.05% per year, or $5 for every $10,000 invested.
  • Plan participants may opt to take a loan from their 401(k) account. These loans must be paid back with interest (usually the going interest rate at the time the loan is taken out, plus 1%-2%) within 60 months. Proponents[3] , say it's cheaper and easier to obtain a 401(k) loan than a typical bank loan; opponents[4] note that plan participants lose out on the compound interest the loan amount could be earning.
  • Plan participants may also opt to take an early withdrawal from their 401(k) if they face a financial hardship. The fees and taxes paid for early withdrawal are steep, notes www.401k.org[5] , a website maintained by the Plan Sponsor Council of America, a trade organization. Early withdrawal fees include a 20% mandatory federal withholding, a 10% early withdrawal penalty, and, on top of those, additional federal and state income taxes.
Shopping for a 401(k):
  • The U.S. Department of Labor provides a fact sheet[6] with detailed information on how and where to find fees and expenses related to a 401(k) plan under new rules that are effective in August 2012.
  • The Investment Company Institute[7] notes that fees are only one consideration when selecting a 401(k) plan. Other considerations include the plan's historical performance and the risk of its fund. ICI encourages investors to weigh all considerations against their own goals.
  • Financial information company BrightScope.com rates every public and private investment plan on many characteristics, including fees.
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External Resources:
  1.  www.ici.org/pdf/fm-v19n5.pdf
  2.  guides.wsj.com/personal-finance/retirement/what-is-a-401k/
  3.  www.forbes.com/2008/09/02/401k-loan-borrowing-pf-education-in_rw_0902investopedia_inl.html
  4.  www.kiplinger.com/article/credit/T001-C000-S001-the-pitfalls-of-a-401-k-loan.html
  5.  www.401k.org/401k-and-divorce.php?fileticket=UJGmAYbIFTI
  6.  www.dol.gov/ebsa/newsroom/fsparticipantfeerule.html
  7.  www.ici.org/pdf/fm-v19n5.pdf
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